High Court sanctions a cross-class cram down of a dissenting secured creditor as part of a Part 26A restructuring plan
In the High Court matter of Amicus Finance Plc (In Administration)  EWHC 3036 (Ch), Norris J sanctioned a restructuring plan ("RP") which included the cross-class cram down of a dissenting secured creditor. Although RPs including cross-class cram downs are a well-established practice in the United States under Chapter 11 of the US Bankruptcy Code, Amicus is the first RP of its kind in the UK mid-market.
Part 26A restructuring plans: a revolution in English restructuring law?
The Part 26A rules were introduced to the Companies Act 2006 ("CA 2006") by Schedule 9 of the Corporate Insolvency and Governance Act 2020 ("CIGA 2020") as a new tool for corporate rescue. It is widely expected that RPs will become more common since they provide an alternative, more debtor-friendly, approach for implementing restructuring proposals than the conventional Scheme of Arrangement under Part 26 CA 2006.
Whilst the RP process has similarities to the scheme of arrangement process, there are a few key differences which parties must be aware of:
- Part 26A RPs are only available to companies which have "encountered, or are likely to encounter, financial difficulties likely to affect their ability to carry on business as a going concern". In contrast, Part 26 schemes may be used in a number of different types of transaction, including when companies are not in financial difficulties.
- In order for an RP to be sanctioned, votes in favour representing 75% of the value of the creditors' debt or members' shares is sufficient. In contrast, a Part 26 scheme requires a majority by number of the creditors or members to vote in favour, and for the majority in favour to represent 75% by value of the class.
- Part 26A RPs, unlike a Part 26 scheme, allow a court to sanction the cram down a class of dissenting voters, provided certain conditions are met (more on this below).
Given that the Part 26A rules are intended to be used to help companies in financial distress, RPs now give a company or insolvency officeholders a novel ability to side-step an objecting creditor or member who would otherwise have a veto power to block a viable restructuring proposal.
Cram downs and the relevant alternative
Under s. 901G CA 2006, the Court has the discretion to sanction an RP which is not agreed by a dissenting class of creditor or shareholders if the court is satisfied that two conditions are met:
A. None of the members of the dissenting class would be worse off than they would be under the relevant alternative; and
B. The RP has been approved by at least 75% in value of a class of creditors or shareholders, who would receive a payment or have a genuine economic interest in the company, in the event of the relevant alternative.
For the purposes of deciding whether these two conditions are satisfied, "the relevant alternative" is whatever the court considers would be most likely to occur in relation to the company if the RP were not sanctioned.
In many situations involving a financially distressed company, the relevant alternative will simply be the immediate liquidation of the company. Therefore, the Court will often be considering whether, on a balance of probabilities, the dissenting class will be better off under the RP which it does not approve of versus the position it would be in if the company went into immediate liquidation.
In Amicus, Norris J sanctioned the RP, noting that the uncertainties surrounding the returns to creditors under the proposed RP were not material, and to the contrary the returns available to creditors in the event of an immediate liquidation would be even more uncertain. Further, he noted that the RP proposed by Amicus's administrators was one which an honest and intelligent creditor addressing its terms from the standpoint of ordinary class interests could rationally regard as "fair".
Court's outcome-focussed approach
Norris J's judgment shows that the Courts will approach Part 26A restructuring plans pragmatically, especially when considering whether to sanction an RP which does not have the consent of one or more voting classes. In particular, the Court will have regard to the fact that the utility of the Court scrutinising a proposed RP lies in its ability to produce an outcome which it considers fair for the creditors or members of a company in distress, and this utility will be lost if the Court cannot do so within a tight timeframe. Therefore, the jurisdiction of the Court approving the RP is not to determine all the detailed issues which lie between the company and its creditors or members, but to provide enough scrutiny so that a fair outcome can be achieved within a desired timescale.